Baker Hughes 2007 Annual Report Download - page 28

10 Baker Hughes Incorporated
Compensation Consultant
The Compensation Committee has retained Mercer as its
independent compensation consultant since June 2005. Mercer
advises the Compensation Committee on all matters related to
the Senior Executives’ compensation and general compensation
programs, including industry best practices. This relationship
continued in 2007 with Mercer providing continued consultancy
services to the Compensation Committee.
Mercer assists the Compensation Committee by providing
comparative market data on compensation practices and pro-
grams (the “Survey Data”) based on an analysis of twelve
publicly-traded, energy related companies that are competitors
of ours (the “Peer Group”). The Peer Group, which annually
is reviewed and approved by the Compensation Committee
with the assistance of Mercer, is used to benchmark executive
compensation levels against companies that have executive
positions with responsibilities similar in breadth and scope to
ours and have global businesses that compete with us for
executive talent. With such information, the Compensation
Committee reviews and analyzes compensation for each
Senior Executive and makes adjustments as appropriate. The
following ten companies comprise the Peer Group: Anadarko
Petroleum Corporation, Apache Corporation, BJ Services
Company, Devon Energy Corporation, Halliburton Company,
National Oilwell Varco Incorporated, Schlumberger Limited,
Smith International Incorporated, Transocean Incorporated and
Weatherford International Limited. An analysis based on recent
financial data shows that amongst our Peer Group we ranked
fifth in revenue as of June 30, 2007 and sixth in market capi-
talization as of September 30, 2007. The Compensation Com-
mittee reviews the Survey Data annually. The Survey Data and
general economic conditions and marketplace compensation
trends are evaluated with the assistance of Mercer.
Mercer advises the Compensation Committee in (1) deter-
mining base salaries for Senior Executives, (2) setting individual
performance goals and award levels for Senior Executives for
the Long-Term Incentive Plan performance cycle and (3)
designing and determining individual grant levels for the long-
term incentive awards for Senior Executives.
From time to time Mercer provides advice to the Gover-
nance Committee with respect to reviewing and structuring
our policy regarding fees paid to our directors as well as other
equity and non-equity compensation awarded to independent,
non-management directors, including designing and determining
individual grant levels for the 2007 long-term incentive awards.
Management has retained Stern Stewart & Co., an indepen-
dent consultant since January 2006, to assist the Committee
by making recommendations on Baker Value Added (“BVA”)
targets used in the Long-Term Incentive Plan as a measure for
Performance Units. Stern Stewart & Co. was retained for this
specific purpose due to the fact that they are the originators
of the Economic Value Added financial measure on which BVA
is based. The relationship with Stern Stewart & Co. continued
in 2007 and will continue throughout 2008. All other consult-
ing on best practices and market compensation levels are pro-
vided by Mercer.
Overview of Compensation Philosophy and Program
The purpose of our compensation program is to reward
exceptional organizational and individual performance. The
following compensation objectives are considered in setting
the compensation programs for our Senior Executives:
•฀ drive฀and฀reward฀performance฀that฀supports฀the฀Company’s฀
core values of integrity, teamwork, performance and learning;
•฀ provide฀a฀significant฀percentage฀of฀total฀compensation฀
that is at-risk, or variable, based on predetermined perfor-
mance criteria;
•฀ require฀significant฀stock฀holdings฀to฀align฀the฀interests
of Senior Executives with those of stockholders;
•฀ design฀competitive฀total฀compensation฀and฀rewards
programs to enhance our ability to attract and retain
knowledgeable and experienced Senior Executives; and
•฀ set฀compensation฀and฀incentive฀levels฀that฀reflect฀competi-
tive market practices.
To reward both short and long-term performance in the
compensation program and in furtherance of our compensation
objectives noted above, our executive compensation philosophy
includes the following two general principles:
(i) Compensation levels should be competitive
and should be related to performance
The Compensation Committee reviews the Survey Data
to ensure that the compensation program is competitive with
the Peer Group. We believe that a competitive compensation
program will enhance our ability to attract and retain Senior
Executives. The Compensation Committee also believes that
a significant portion of a Senior Executive’s compensation
should be tied not only to individual performance, but also
to the performance of the Senior Executive’s business unit,
division or function, and to Company performance measured
against both financial and non-financial goals and objectives.
Senior Executive compensation levels should be relative to the
earnings of our stockholders. If the Company performs well
and over time the value of the Company’s stock increases,
then Senior Executives should be compensated for their lead-
ership. We also place emphasis on relative performance within
the Peer Group as a means to ensure that we consistently
deliver stockholder value. During periods when performance
meets or exceeds the established objectives, Senior Executives
should be paid at, or more than, expected levels, respectively.
When our performance does not meet key objectives, incen-
tive award payments, if any, should be less than such levels.
(ii) Incentive compensation should represent a large por-
tion of a Senior Executive’s total compensation and
should balance short and long-term performance
The Company minimizes the amount of fixed compensa-
tion paid to Senior Executives in order to minimize costs when
Company performance is not optimum. A significant portion
of a Senior Executive’s compensation is incentive compensa-
tion, which provides Senior Executives with an incentive to
increase Company profitability and stockholder return. The
larger portion of compensation is paid in the form of variable
pay (incentive compensation), in the form of short-term and
long-term incentives, which are calculated and paid based pri-
marily on financial measures of profitability and stockholder